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According to the International Monetary Fund (IMF), the inadequate central bank credibility and a fragile banking sector in emerging nations might make cryptocurrencies look to citizens as a secure form of currency.
This was revealed by the IMF in a paper titled ‘COVID-19, crypto, and climate: Navigating Challenging Transitions.
COVID-19, Cryptocurrencies, and Climate Navigating Challenging Transitions Says IMF
According to the IMF, crypto usage is surpassing that of advanced countries in certain emerging markets and developing economies, fueling a surge of ‘cryptoisation.’
“Some potential pull factors for crypto adoption, such as speculative retail investing, may be common across countries, but some of the recent drivers are likely more specific to a subset of emerging markets and developing economies. For example, weak central bank credibility and a vulnerable banking system can trigger asset substitution as domestic residents seek a safer store of value.”
Dollarisation pressures, according to the IMF, are a chronic danger for numerous emerging markets and developing countries.
"The crypto ecosystem can assist domestic people to transform some of the headwinds of conventional dollarisation, such as exchange rate limitations and difficulties accessing and holding foreign assets, into tailwinds," it added.
“For example, global crypto exchanges or other less secure methods, such as P2P transfers, can be used to bypass capital flow management measures; private wallets can act as a form of offshore bank account to store wealth.”
Inefficiencies in payment systems, such as a lack of interoperability across multiple domestic payment systems, are a key concern for remittances and commerce, according to the fund.
Crypto Appear to Be a More Secure Kind of Currency
It stated that due to the high proportion of unbanked persons in several emerging markets and developing countries, remittances were sent via inconvenient cash-based channels such as post offices and other transfer operators.
The IMF noted that crypto-asset payment rails may make some of these services quicker and cheaper, particularly with the incorporation of stablecoins.
Although these improvements were contingent on access to the internet and other technology, which were rare in many of these nations, the report stated.
“Whatever form of achievement is made by adoption of crypto as remittances will have a marginal impact on monetary policy or capital flows as the underlying crypto assets will likely be held for only a short time before it is exchanged into the local currency,” it said.
The IMF identified "cryptoisation" as a danger to the fiscal policy since crypto assets facilitated tax evasion, and it added that seigniorage revenue may also fall as the role of central bank money in the economy shrinks.